|"Copenhagen Consensus" theme:
cost-effectiveness versus cost-benefit
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Lomborg stresses that the money must be allocated to those projects where they do most good. This idea is, of course, not new. For many years it has been common practice to calculate the cost-effectiveness of interventions to treat or prevent diseases. It has been less common to calculate the cost-benefit ratio. Let us have a look at the difference between the two approaches.
Let us first look at cost-effectiveness. If we want to prevent the spread of HIV/AIDS, it is very effective to distribute free condoms. This will on average prevent one HIV infection for a cost of about US$ 14. You may also treat HIV-infected adults with anti-retroviral drugs to avert an outbreak of AIDS. This will probably cost about US$ 100,000 per outbreak averted, depending on the price you have to pay for the drug. So if you want to prevent that people die from HIV/AIDS, it is about 7,000 times more effective to distribute free condoms than to treat people with drugs once they are infected. Such figures are useful when you want to prioritize your efforts. If you have a limited funding for fighting the disease, then it is sensible to launch a full-scale effort for that type of intervention which is most cost-effective. That done, you may proceed with that intervention which is next most effective, and so on until all your money has been spent. By following that principle, you will more or less have obtained an optimal prioritization of your money.
Cost-effectiveness figures can of course also serve
as guidelines when you are forced to choose between efforts against
different diseases. For instance, if treatment of one case of
tuberculosis costs US$ 500, and treatment of one case of pneumonia
costs US$ 2, you will help more people by allocating your resources to
One may argue that it is more important to save the
lives of young people than the lives of old people who would soon have
died anyhow. Therefore it is common to speak of "years of life lost"
(YLL). If for instance the average lifetime of a person in a society is
67 years, and an individual person becomes deadly ill at an age of 44
years, then the years of life lost are 67 - 44 = 23. If your ambition
is to save as many life-years as possible, then you may calculate the
costs relative to the number of YLLs spared. Rather than simply
counting the years, it is common to count the "disability adjusted life
years" (DALY), i.e. a figure where years with reduced life quality and
reduced ability to work do not count as full years. It is usual to
calculate the cost effectiveness as costs per DALY.
All this works well with the cost-effectiveness
measure. What is the difference between this and calculating the
cost/benefit ratio ?
The principle in the cost/benefit method is that not
only the costs, but also the benefits are expressed in money units.
That is, in order to do this calculation, you must put a price on a
human life or on a DALY. The usual method to do that among economists
is to calculate the value of a year of life lost from the per capita
Gross National Income in the country concerned. For example, in a
paper (by Richard S. Tol (2002):
Environment and resource economics 21: 47-73) life loss is
valued at 200 times the per capita income. Once the price of a human
life has thus been decided upon, it is rather easy to go from
cost-effectiveness to cost-benefit calculations.
What is unpleasant about this, is of course that it is not nice to express the value of a human life in monetary terms. It is especially unpleasant if the per capita income is, say, 100 times higher in a very rich country than in a very poor country, because that means for instance that the value of a human life in Mozambique is worth only 1/100 of a human life in Switzerland. When calculating what pays on a worldwide scale, one will nearly always find that saving lives in Mozambique is nearly not worthwhile, as long as it happens at the expense of moderate economic disadvantages in rich countries. This is a good reason why many persons altogether reject the principle of cost/benefit analysis as it is used by Lomborg.
But why, then, does Lomborg insist on using the
cost/benefit principle? It cannot be because of the need to prioritize
the money, because prioritization is certainly possible on the basis of
cost-effectiveness calculations. Lomborg´s reason is that
cost/benefit allows prioritization of money that could be allocated to
widely different economic sectors. He wants to compare sectors as
different as human health, climate change, armed conflicts and
financial stability. In order to do that, all kinds of benefits must be
expressed in the same units - money units.
This goes against common thinking. There are many
values that cannot be expressed in monetary units. For instance, the
preservation of plant and animal species is seen by many people as an
ethical obligation independent of the eventual monetary value of a
species, just as the preservation of a human life is seen as an ethical
obligation, even if that human person does not contribute to the gross
national income. This way of thinking does not go against wise use of
money - it is possible to calculate cost effectiveness both when saving
species from extinction and when saving life years for elderly people.
Another kind of non-monetary value is the value of
security, peace and harmony. For instance, if an elderly lady walks in
the street, and a young boy comes running by and snatches her bag, then
the loss is not equal to the monetary worth of the stolen bag. The loss
also includes the loss of security - the lady does no longer dare to
walk in the street, and the induced fear cannot be evaluated in money
terms. If a society has a small difference between rich and poor, then
the society will be relatively harmonious, and people will tend to be
more happy. But this happiness cannot be expressed as a sum of money.
Therefore, by insisting on comparing anything and
expressing all benefits in monetary units, Lomborg goes against the
conviction of many people, and he should not expect that people would
accept the results of such calculations.
This is not the only objection to the cost/benefit
method. Another important objection is that you cannot or should not
compare widely different benefits that accrue within widely different
time horizons. The method used by Lomborg and many economists to do
just that, is the method of discounting. By choosing a discount rate,
one chooses how much a benefit in a far future is worth relative to a
benefit that accrues already next year. But such a judgment cannot be
made in an objective way; it will always be subjective, and the choice
of discount rate is subjective. If my time preferences are different
from Lomborg´s time preferences, I will use a different discount
rate (or no discount rate at all), and I will arrive at a cost/benefit
ratio very different from the one Lomborg arrives at. Furthermore, when
the discount rate is set at a positive value, we presuppose that future
generations will be richer than we are, and that a certain good which
is important to us today will be less important to them, relative to
their greater wealth. But we cannot know if this presupposition is
true. It could be that certain goods will be extremely valuable to
future generations, and that they should therefore be discounted with a
very small or even negative discount rate, whereas they will not care
at all about certain other goods which could therefore be discounted
with a high discount rate. Only he who knows what will happen in the
distant future - and nobody knows that - can tell what discount rate
will be correct. Therefore it is absurd to postulate that we can make
sensible choices of discount rates now.
Finally, one further objection is that the
cost/benefit method neglects the precautionary principle - another
point where values cannot very well be expressed in monetary terms.